Xiaomi – Is It Losing The Hype And Shine?

Xiaomi became a super hit in no time giving a run for their money to even the smartphone bigwigs like Samsung (SSNLF) and Apple (NASDAQ:AAPL). In probably the shortest time span Xiaomi became the third-largest smartphone selling company in the world and created history. However was this high-spirit success run a temporary bubble since of late the Chinese smartphone maker has been reported losing steam from its aggressive market movement. Xiaomi’s rise was sudden fueling its graph to such heights that even the names like Apple and Samsung had started to go in a tizzy and was feeling threatened by the rapid rate of growth of the Chinese smartphone honcho. In our earlier articles we had also presented the snapshots of Xiaomi’s high octane success run, but if we are to believe the current market updates Xiaomi is losing steam at an equally rapid rate. Let us take a dig into what is exactly happening at the Xiaomi backend and how is it currently faring.

The rapid growth of China’s top smartphone maker is starting to lose its shine. A patent dispute has forced Xiaomi to stop selling handsets temporarily in India, the second-largest population holding country. Xiaomi could probably pay up and start selling again, but patent fees will likely squeeze margins and in turn the company’s valuation.

The patent row hit the company just five months after Xiaomi became the world’s third largest smartphone maker and was enjoying the overwhelming results. Swedish group Ericsson (ADR) is demanding that the Chinese smartphone maker compensate it for using protected technology in its phones in India. The magnitude of financial impact on Xiaomi does not look that serious since the bulk of the company’s $5 billion in sales the first half of this fiscal year came from its home turf of China.

According to a recent research by IDC the Chinese smartphone maker’s shipments to India will reach over 80 million units by the end of the year and are expected to scale up at an overwhelming rate of 40% over the next five years. Hence if Xiaomi has to stop its Indian tryst even for a temporary span will severely jolt Xiaomi’s efforts to replicate its Chinese success in India’s already crowded market, where Samsung and Microsoft (NASDAQ:MSFT) are waging war against the growing local brands like Micromax and Karbonn.

What next?

A probable solution about which most of the market experts are speculating is that Xiaomi could probably settle with Ericsson and continue its overseas ventures – the smartphone maker took in $565 million in profits in 2013, according to the Wall Street Journal, citing the company’s own document. But patent fees will also eat into its profitability significantly. It could also open the doors to other patent lawsuits elsewhere. Chinese hardware giants Huawei and ZTECorp (ZTCOY) have already sent warnings to Xiaomi, local media reported in November. Hence even though Xiaomi made great advances in its sector but the whole entourage seems to be infested with a lot of legal issues on the tech front, not a very good sign for a blooming tech company.

Higher costs will likely undermine Xiaomi’s valuation, which according to reports of its latest funding round could be as much as $50 billion. That’s almost 4.4 times the handset maker’s current year’s sales – more than what Apple trades on. After its Indian drive hit the roadblock, Xiaomi’s credibility looks to be quite murky and uncertain.

Parting words

Xiaomi rose to great heights in a remarkably short span of time and its upward graph looks rather steep but with the legal tangles coming its way the smartphone giant has been losing the fizz quite rapidly. Also the roadblocks have had a diminishing effect on its business worth and should be a matter of worry from an investor point of view. As opposed to our previous outlook of keeping a close watch on when the company goes for an IPO and then buying in, with the ongoing issues we would rather suggest a cautious move even after the company goes for public listing. The Indian episode will scar the reputation of the company to a great extent and will also reflect in its sales numbers in the recent future. Given to understand that India is one of the rapidly growing economies of the world where consumer movement is at all time high and all the global companies are lining up to have their share of Indian pie, if Xiaomi has to lie low it will have to miss out on the number game. This discomfort at Xiaomi’s end has to be taken care immediately to avoid further loses. For us it would be wise to watch how Xiaomi steers past this issue and that would give us a lot of insight on the management of the company and help us take better decision about the smartphone player in future.

About the author:

reports.droy

We are a group of analysts exploring and analyzing different domains of business and writing reviews based on information available in public domain web portals. We do not hold any stock or investment position in any of the companies that we write for.

Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC.
Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.